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In the past two years, a slowdown in China has clobbered the price of iron ore, a key ingredient in making steel. Iron-ore prices fell to $85 a ton last fall from a high of $189 in 2011, before recovering to a recent $137.

Few companies were hurt as much as
Cliffs Natural Resources,
CLF -5.593056894889103%Cliffs Natural Resources Inc.U.S.: NYSEUSD9.79
-0.58-5.593056894889103%
/Date(1481308352901-0600)/
Volume (Delayed 15m)
:
11936368
P/E Ratio
53.005464480874316Market Cap
2391322036.90338
Dividend Yield
N/ARev. per Employee
682221More quote details and news »CLFinYour ValueYour ChangeShort position
a Cleveland-based miner of iron ore and coal founded in 1847. The company's earnings plummeted, and its shares (ticker: CLF) lost 73% of their value in the past year, including a drop of 52% in 2013. That makes Cliffs, which closed Friday at $18.45 the worst performer this year in the Standard & Poor's 500.

Cliffs' shares discount an iron-ore price drop, says an analyst, and could be set to double. Above, a Minnesota mine.
Cliffs Natural Resources, Inc.

Cliffs was laid low, in large part, by its $5 billion acquisition in January 2011 of a Canadian iron-ore miner, whose Bloom Lake mining project has proved a huge disappointment. In recent months, a dilutive equity offering and a large dividend cut, along with fears the seaborne iron-ore market is becoming oversupplied and heading for a significant price drop, have sent more investors running for the hills.

But the latest selloff, which has left the shares trading at 60% of tangible book value, appears overdone. Michael Gambardella, an analyst at JPMorgan, thinks the stock is already discounting a significant drop in the price of iron ore, and says the oversupply fears are overblown. As Cliffs' management shows improved execution at Bloom Lake in the next year, he sees the shares more than doubling.

Gambardella is a rare bull on Cliffs, which has attracted a large cadre of short sellers. About 20% of the stock's float was sold short as of mid-March. Barron's was bullish on the company in an ill-timed story early in 2012 ("Shifting Strategy to Meet Shifting Demand," Jan. 30, 2012), only to see the shares slide sharply.

Cliffs earned $493 million, or $3.45 a share, last year, down 72% from 2011. Earnings were hurt by lower prices for seaborne iron ore and higher costs associated with Bloom Lake. Revenue declined 11%, to $5.9 billion. Earnings could fall to $1.89 a share this year, but begin rising in 2014 as production at Bloom Lake ramps up.

Recent Price

$18.45

52 Week High-Low

$71.60-$17.95

Market Value

$2.7 billion

2012 Revenue

$5.9 billion

2012 Net Income

$493 million

2012 EPS

$3.45

2013E EPS

$1.89

Price to Tangible Book Value

0.6

E=Estimate Source: Thomson Reuters, FactSet

Bloom Lake, in Quebec, is the centerpiece of Cliffs' strategy to tap growth in Asia by expanding its production of seaborne iron ore. Bringing the mine online has taken longer and been costlier than expected. Management is targeting production of 14 million tons at Bloom Lake by 2015.

On an annualized basis, based on December production, the mine produced seven million tons of ore, below the company's previous target of eight million. Expected production costs this year of $70 to $75 a ton compare with the original target of $40 to $45 a ton. Management is committed to completing the project by 2015. On a Feb. 13 earnings call, Cliffs' CEO, Joseph Carrabba, called Bloom Lake "the future of the company." Carrabba couldn't be reached for comment.

CLIFFS HAS $3.8 BILLION in net debt, much of it acquired to finance the Bloom Lake buy. A credit ratio triggered a violation of a debt covenant late last year. To shore up its balance sheet and proceed with Bloom Lake, Cliffs restructured some debt, raised more than $900 million by selling equity, and slashed its dividend by 76%, saving $250 million a year. Shares now yield 3.3%. The moves, while painful, are likely to keep the company on track.

The wild card is the price of seaborne iron ore, which some analysts expect to fall below $100 a ton, as the market becomes oversupplied. Gambardella disagrees. He thinks the large miners will exercise supply discipline, as they did last fall, and that marginal iron-ore costs could remain above $100 through 2020. His price target is $40, based on a multiple of 7.5 times enterprise value to 2015 estimated Ebitda (earnings before interest, taxes, depreciation, and amortization).

The downside for Cliffs could be limited, given the stock's depressed valuation. If the shares fall further, the company could become an acquisition target. That probably would send the price higher, and the short sellers to the hills.